With the Lifetime Allowance reducing to £1.25m from 6 April 2014 individuals are being given the chance to fix their Lifetime Allowance at £1.5m after April 6 through Fixed Protection 2014. However, to do so, pension members must leave their pension schemes by April 5. BROADSTONE are concerned that many pension members and their advisers are overreacting to the change to the long term detriment of members. In particular, members may not be adequately compensated for leaving pension schemes and the consequent significant savings the employer may be making.
Leaving a pension scheme, particularly some years from retirement, is a hugely significant decision and not to be taken without very good reasons. Those that are in defined benefit schemes should be particularly wary of leaving. However, BROADSTONE have seen an increasing amount of commentary suggesting that individuals do just that. Usually this is based on a set of "what if" growth assumptions often suggesting that even relatively modest funds may exceed the Lifetime Allowance if growth is good and the funds are invested long enough.
Sure, this may happen and the tax charges on pension funds over the Lifetime Allowance are currently high, although by no means disastrous. But equally, growth forecasts may prove wildly optimistic. Most worryingly however these assumptions presuppose that in the next 10-15 years our pensions system will not change. Will the Lifetime Allowance still be at £1.25m in 2024? Will we still have a Lifetime Allowance? Could anyone have predicted ten years ago what the pension rules will be now?
The Lifetime Allowance has become a political matter but if pensions are to retain their relevance the Lifetime Allowance will surely rise at some point (or be completely changed). Continuing to accrue tax relievable benefits must still remain an important part of good saving discipline until there are clear and immediate benefits to changing that course of action.
To suggest that a pension member forgoes the benefits of an employer's pension scheme to potentially avoid a tax charge at some future date without adequate compensation or clear short term benefit means members throwing money away.